A loan that is backed by the value of a property and not a borrower’s credit score is known as a hard money loan. It is the property provided by the borrower that will assure the lender they will not default on the loan. These types of loans, when compared to traditional loans, provide the borrower with quick and easy access to investment funds.
Short-Term Financing Option
Hard money loans are a popular method for obtaining short-term financing. This will give a borrower flexibility and quick access to funds when capital is essential for a timely investment. These loans require borrowers to meet fewer qualifications than a conventional loan and feature interest-only payments.
When needing funding for short-term investments, hard money loans can be a valuable tool. It can enable a borrower to have quick access to funds needed for the purchase as well as renovation of property. A conventional loan could take too much time and involve too much paperwork. A hard money loan makes it possible for a borrower to quickly get a property, renovate it, sell it or rent it to tenants.
A hard money agreement provides a higher degree of flexibility when compared to a conventional loan agreement. With this type of loan, a lender’s standard process for underwriting a loan is not utilized. In this situation, each deal is given an individual evaluation of its merits. Certain aspects of this loan can be negotiated such as repayment schedules and more. With a hard money loan, the most important thing a borrower has is collateral. Lenders are often motivated to lend as much as a borrower’s collateral is worth.
These are long-term investors who simultaneously own many different properties. Should they come upon a property they would like to finance, it may be difficult for them to obtain a loan from a conventional mortgage lender. When a conventional lender sees a borrower with up to ten mortgages, they are hesitant to grant them a loan. In this case, an investor may not have any other choice but to get a hard money loan using their current properties for collateral.
A hard money loan can help a borrower, but it can also be very negative if not utilized properly. When a hard money loan is obtained, it is important the borrower have a plan in place to repay the loan quickly and obtain profits. Should this not happen, the expense associated with a hard money loan could be financially harmful. It’s also possible for a lender to value a property much differently than the borrower. In many cases, a hard money loan may come with double-digit interest rates.
During this time, a borrower will learn about their loan options and be asked to provide various documents. This could include up to three months of bank statements, proof of employment, two recent pay stubs, proof of debt to income ratio being less than 50 percent, a personal credit score of over 640 and more. Once this is completed, an investor will learn about the potential size of their loan, terms, fees, costs and then set a maximum budget. When this is done, an investor can receive the funds and move forward with their investment.
Prior to this happening, a hard money lender may require a purchase contract concerning the investment. This should show the details of the agreement between the borrower and the seller of the investment. Appraisals of investment can be provided but are often conducted by the hard money lender. A borrower may be asked to provide list of past projects showing how they were handled and their end result.
Hard money loans are an important tool for investors who need to obtain funds quickly and easily. They are popular with those who fix and quickly flip various properties. They also are important to property investors who want to renovate their investment property for tenants. The ability to provide a quick approval process as well as interest-only payments make hard money loans attractive to many investors.
Understanding Hard Money Loans
A method of borrowing money for the purchase of real estate that doesn’t involve the use of a traditional mortgage is called “hard money.” Since traditional mortgage loans can be difficult to obtain, hard money loans have become a fast and easy solution for a lot of real estate investors and developers. Below you’ll find information about the ins and outs of hard money loans.
About Hard Money Loans
Unlike traditional mortgage loans, hard money loans are made based on the value of your property that’s used for collateral. Hard money lenders are investment companies and private investors that consider each individual application during the loan approval process. While banks follow strict guidelines, hard money lenders are more lenient and likely to forgive poor credit, foreclosures and bankruptcies. Banks go to great lengths to make sure you are able to repay a loan, but hard money lenders focus on the collateral because it gives them a recourse in the event that the loan goes south down the road.
There are a variety of different hard money loans. A bridge loan allows you to purchase a property that you plan to refinance or resell. You can also use a bridge loan to purchase a property before getting the cash down payment from selling a property that you already have in your portfolio. A fix-and-flip loan is self-explanatory – it enables you to buy a property, fix it up, resell it, and then pay off the loan. A construction loan will let you start a new construction project, then refinance or sell the property as soon as possible.
About ten percent of hard money lenders provide owner-occupied loans in some states, but most do not because there are a lot of regulations that accompany consumer loans. The Dodd–Frank Wall Street Reform and Consumer Protection Act is an example of a regulation that must be followed and can complicate the lending process. There are also licensing requirements that would not otherwise apply. If you’re interested in an owner-occupied loan, there’s still a chance that you can find a hard money lender that offers this type of loan.
How Hard Money Loans Work
The turnaround time for a hard money loan is usually less than a week. Borrowers typically must have a cash down payment that will be determined based on the Loan-To-Value (LTV) or After-Repair-Value (ARV) ratio. Just keep in mind that it depends on the hard money lender, and the criteria varies. The term for hard money loans is usually from 12 months to several years. The payments are unlike most traditional bank loans because you may not be required to make equal principal and interest payments each month. Instead, you may only be required to make monthly interest payments. There are even loans that don’t require any payments until the loan matures, at which point you’ll make a balloon payment. That final payment includes the principal, all remaining interest and any fees.
Is a Hard Money Loan a Good Alternative?
You might be wondering who uses hard money loans instead of traditional mortgage loans. They are usually secured when someone does not have another lending option, needs money fast or has poor credit scores. Despite the fact that hard money loans have high interest rates and sometimes many fees, they still work for a lot of people. It’s often used as a tool by real estate investors because they value the benefits. Quick money, flexible terms and lenient requirements provide real estate investors with the financial resources needed to achieve their goals.
If you’re in a buyers market, then it wouldn’t be a good idea to get a hard money loan because it could be difficult to sell the property after fixing it up. You also don’t want to get a hard money loan if a cheaper option is available. The reality is that sometimes no other option exists, which can make a hard money loan a great alternative.